Leverage definition

Leverage is a concept that can enable you to multiply your exposure to a financial market without committing extra investment capital.

In investing, the amount needed to open and maintain a leveraged trade is called the margin. Trading using leverage is sometimes referred to as margin trading.

Leverage is available on several financial products, including spread bets, CFDs and forex trades. When trading using leverage, the provider will only ask for a fraction of the total value of your position: the rest is effectively lent to you by the provider.

Profits and losses are based on the total size of the position, so the end result of a trade can be much larger than the initial outlay. Losses can end up exceeding the initial deposit.

Leverage example

You want to open a position on AstraZeneca. With IG, you will be margined on the total consideration of the trade.

If the stock is margined at 20%, shares are valued at £45 and you want to trade 500 shares, your margin will be £4500. This is because margin is calculated as

Number of shares x share price x margin percentage

So 500 shares x £45 per share x 20% = 4500

Therefore, when trading on leverage, in order to obtain an exposure equal to 500 shares in AstraZeneca, you only need to hold a deposit of £4500 instead of buying £22,500 worth of shares in the underlying market. 

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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.